Effective tax rates on the squeezed middle are much lower than generally perceived

[PMU]

There is a misunderstanding here on the difference between effective and marginal tax rates. Marginal tax rates are what you pay and in Ireland for a single person it's 40% on taxable income above EUR 33,800, and 20% on income below that threshold. That is the figure on which you pay tax, i.e. 40% on taxable income above 33,800 and everyone paid above this threshold pays tax that at this rate.

The 'effective' tax rate is just a makey-up number, of dividing your total income tax payments by your total income. Nobody pays tax at this rate. It ignores the absolute amount of tax you pay and also that taxable income can be reduced by allowances, etc. For example, Warren Buffet probably has a lower effective tax rate than I have, but that doesn't mean that Buffet is better off than I am. He pays much more tax. Similarly, if you are on a seemingly 'low' effective tax rate it doesn't mean you do not have a high tax liability and you do have a personal tax obligation at 40%.

Marginal tax rates are ludicrously high in Ireland relative to the rest of the EU. If you look at KPMG's interactive tax calculator https://home.kpmg.com/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online.html you will see that marginal tax rates in Ireland have increased from 41% in 2008 to 48% in 2011 and have remained at this figure. (The KPMG figure includes USC.) This is grossly higher than the EU average that ranged from 37.56% in 2008 to 39.96% in 2016. The KPMG tables do not show the income threshold at which the tax marginal rate kicks-in but in Germany it's 254,447 EUR; 150,000 GBP in the UK; 66,422 EUR for NL (and 38,080 EUR in BE (but you can claim a lot against tax in Belgium)).

 

[Brendan Burgess]

The 'effective' tax rate is just a makey-up number,

Hi PMU

Let me ask you the question, I asked earlier:

Which would you prefer, if you were earning €30,000?
To pay €3,000 tax in total, but a marginal rate of 40%
or
€6,000 tax in total, but a marginal rate of 20%?

Personally, I would prefer to see 10% of my income going in tax, rather than 20%, even if they are "makey up" numbers.

Brendan

 

[T McGibney]

Hi PMU

Let me ask you the question, I asked earlier:

Which would you prefer, if you were earning €30,000?
To pay €3,000 tax in total, but a marginal rate of 40%
or
€6,000 tax in total, but a marginal rate of 20%?

Personally, I would prefer to see 10% of my income going in tax, rather than 20%, even if they are "makey up" numbers.

Brendan

Of course every individual would prefer a lower tax burden at their particular income level.

But the question here is something entirely different: whether or not it is better for an economy to have workers pay comparatively more income tax on low income and comparatively less on additional marginal income, than they do at present.

 

[PMU]

Hi PMU

Let me ask you the question, I asked earlier:

Which would you prefer, if you were earning €30,000?
To pay €3,000 tax in total, but a marginal rate of 40%
or
€6,000 tax in total, but a marginal rate of 20%?

Personally, I would prefer to see 10% of my income going in tax, rather than 20%, even if they are "makey up" numbers.

Brendan

In this scenario:

If you pay EUR 3,000 tax in total at a marginal rate of 40% it implies you have a taxable income of 7,500, i.e. the marginal rate kicks-in at a tax threshold of 22,500, i.e. deductible allowances of 75% of your income.

If you pay EUR 6,000 tax in total at a marginal rate of 20% it implies you have a taxable income of 30,000, i.e. all income taxed at the marginal rate, i.e. no deductible allowances.

So logically you would want to pay at the higher marginal rate because you have a lower taxable income. But, in reality this scenario would never exist. Tax thresholds of 75% of income will never exist in reality for most tax payers, and fi they were this high it would be be easier to forget about collecting income tax and just up VAT, stamp duty, etc. And a 20% marginal tax rate on those with low incomes is cruel.

However, if you are calculating effective tax rates, i.e. and not marginal rates, it is reasonable to add in the amount of residual income deducted for VAT at 23% to calculate the total tax burden on an individual. If you make the reasonable assumption that 90% of post-tax income is spent on standard rate (23%) goods and services the single person has 6,742 deducted for VAT, and the married person has 7,546. deducted for VAT. (Note. I've ignored child benefit here.) Adding these amounts to income tax paid means the married person has an effective tax rate of 28% and the single person one of 35%.

 

[Brendan Burgess]

So logically you would want to pay at the higher marginal rate because you have a lower taxable income.

Thank you.

The marginal rate is just not important. What matters is the tax you pay on your total income.

Some countries have flat rate systems, so a person on €30,000 paying 20% could well pay €6,000 tax.

It's quite conceivable that another country might allow €25,000 tax free , and tax the balance at 40%.

If I were on €30,000, I would far prefer to work in the country with a marginal rate of 40%.


This is a very important issue.

People obsess on the marginal rate of 50% for those earning €33,800. It's just not as important as the actual tax they pay.

A married person with two kids on €40,000 pays either no tax or €3,360 depending on how you view child benefit.

Brendan

 

[Protocol]

The MTR is important for some reasons:

[1] people making decisions at the margin - will I work extra hours, will I do overtime

Also, the MTR facing a spouse / second earner going back to work.

[2] High MTR can encourage tax avoidance and tax evasion


Also note that people, perhaps incorrectly, focus on the top MTR. So if lots of people use it in their decision-making, we must be concerned/interested in it.

 

[shweeney]

The MTR is important for some reasons:

[1] people making decisions at the margin - will I work extra hours, will I do overtime

Also, the MTR facing a spouse / second earner going back to work.

[2] High MTR can encourage tax avoidance and tax evasion


Also note that people, perhaps incorrectly, focus on the top MTR. So if lots of people use it in their decision-making, we must be concerned/interested in it.

this is exactly the point. My current income and tax liability are fixed; I can't do anything about them right now. But I could work more hours, or get a promotion, or change to a better paying job in the future, except every euro I earn will only benefit me by 48c which seems unfair - if I increase my earnings through extra work or initiative, the govt gets more than half the benefit of that. (actually I only see 43c in the € up front, as another 5% goes into my pension, which is at best a gamble).

 

[Ceist Beag]

There is a decent article in the Irish Times on how the past 8 years of austerity have hit a number of different sections of society, including the squeezed middle. It suggests that low earners have been harder hit than the squeezed middle during this period. See the table below, taken from the article. The civil partners scenario at the bottom is a bit misleading as it is comparing two individuals earning a wage in 2008 (and paying tax individually) with those same two individuals in 2016 being taxed as a couple (and thus availing of tax advantages of civil partnership).

How has austerity hit your pocket?

Who are you?	€ annual income	€ monthly take-home income 2008	€ monthly take-home income 2014	€ monthly take-home income 2016	% decline 2008: 2016	€ decline 2008: 2016
Higher earner (self-employed, married with rental income)	175,000	8979	7,955	8,131	-9.4	-848
Millennial (low income)	22,000	1,753.00	1,610	1,634	-6.80	-119
Single income Couple	57,500	3892	3,568	3,688	-5.2	-204
Dual income couple	120,000	7200	6,611	6,834	-5.10	-366
Single public sector worker	37,000	2581	2,386	2,454	-4.9	-127
Single parent	30,000	2329	2,194	2,233	-4.10	-96
Pensioners	48,000	3812	3,724	3,768	-1.20	-44
Civil partners	90,000	5043	4,868	5,014	-0.60	-29